The traditional conventional view among policy and academic economists was that capital flows were unambiguously a Good Thing, a beneficial element of globalisation. The policy prescription which followed was that emerging economies should open the capital markets to foreign flows. The promise was that, provided they let their exchange rates float, things would work out well.
The experience of the past two decades has been less benign. The sloshing backwards and forwards of foreign capital has typically been driven by the abnormal circumstances in advanced economies, rather than by macro-policy mistakes in the emerging economies. A policy framework that presumes these flows to be beneficial is irrelevant to the policy challenge the emerging economies face.
Over the past decade, the policy debate has been inching forward to incorporate the inconvenient reality that the flows may be disruptive. Olivier Blanchard, recently retired as the IMF chief economist, has co-authored two papers from his new base in the Peterson Institute. As he did at the IMF, Blanchard continues to strive to bring the consensus policy framework closer to the real world.
One paper argues that capital inflows can push up asset prices in the recipient country, over-stimulating domestic demand in the process. This might seem like an obvious-enough insight, but is the opposite of the conventional academic model on which much policy prescription had been based.
The second paper argues that foreign exchange intervention can be effective in stabilising the exchange rate in the face of excessive capital flows. Again, this contradicts most academic models, which see intervention as futile or distortionary.I think I posted once about Krugman musing about the value of a more "hands on" approach to capital flows, too.